Claiming
How does going VAT exempt affect the input tax you have reclaimed?
Short answer
Exempt supplies carry no right to recover input tax. If your past course fees turn out to have been exempt, the VAT you recovered on costs linked to them was not recoverable either, so your claim is reduced by that amount. HMRC's Brief 9 (2026) says you can only claim the net amount. The partial exemption rules, and for larger property costs the Capital Goods Scheme, decide how much comes off.
A simple illustration
| Per year, illustrative figures | Amount |
|---|---|
| VAT accounted for on course fees | £200,000 |
| Input tax recovered on costs linked to those courses | £30,000 |
| Net amount that could be claimed | £170,000 |
More detailed examples are on the worked examples page.
Partial exemption
A business that makes both taxable and exempt supplies is partly exempt. Input tax on costs used only for taxable supplies stays recoverable. Input tax on costs used only for exempt supplies is not. Input tax on shared costs, such as rent and IT, is split, usually by the standard method, which uses the value of taxable supplies as a share of all supplies. There is an annual adjustment at the end of each VAT year.
The de minimis limits
You can recover input tax linked to exempt supplies after all if it is no more than £625 a month on average and no more than half of your total input tax. VAT Notice 706 also has two simplified tests that let you treat yourself as de minimis without the full calculation. A provider with a small exempt share may lose nothing. A college whose main income becomes exempt will be well over the limits.
The Capital Goods Scheme
If you bought, built or refurbished premises and recovered the VAT on the basis that you were making taxable supplies, the Capital Goods Scheme may claw some of it back over the adjustment period, which is ten intervals for land and buildings. From 29 July 2026 the threshold for land and buildings rose from £250,000 to £600,000 and computers are no longer capital items, but items already in the scheme stay in it.
Could you have to deregister?
A business must cancel its VAT registration if it stops making taxable supplies. A provider whose only income turned out to be exempt could in principle be in that position, which would bring a charge on stock and assets and final Capital Goods Scheme adjustments. While HMRC's policy is still that these supplies are standard-rated and the appeal is pending, that step would be premature. Many providers also make some taxable supplies, which keeps them registered as partly exempt.